South Korean banks: Higher income but flat structured products activity

The market in South Korea continues to be dominated by autocallables, mainly because volatility has increased and people are starting to get a little more cautious, according to Jeremy Ng, chief executive officer at Leonteq Securities, "Investors in Korea pay more attention to indices and, since volatility is a bit higher, looking just at products using indices tends to offer decent yield," said Ng, during a panel discussion at the 5th Asia-Pacific Wealth Management & Fintech Conference at the end of April. "However, we are beginning to see a slow shift from single stocks into broad market indices and even some sector indices," he said.

Recently, South Korea's major banks have reported improving financial results for the first quarter of 2018 amid decreasing issuance of structured products.

Mirae Asset Daewoo reported a pre-tax income of KRW200.7bn (US$163.2m) for the first quarter of 2018, which represents an increase of 86% compared to the same period last year when pre-tax income was KRW110.1bn. The group's operating profit almost doubled, from KRW91.5bn in the first quarter of 2017 to KRW181.6bn in the first quarter of 2018. Similarly, net operating revenue went up 38.4%, from KRW297.9bn in to KRW411bn.

Investment banking revenue increased by 50%, from KRW38bn in 1Q17 to KRW57.6bn in 1Q18, while revenue from wealth management practices, at KRW60.4bn, also increased slightly from KRW52.8bn.

The main contributors to the increased revenue from the group's wealth management activities were Mirae's mutual funds worth KRW22.5bn and equity-linked securities (ELS) and derivatives-linked securities (DLS) worth KRW16.1bn. Year-on-year, revenue from ELS/DLS went up 41% from KRW11.4bn. SRP data shows that the Grpup issued 352 ELSs and 35 DLSs, up from

Trading income, on the other hand, at KRW52.6bn, decreased by 39% year-on-year from KRW86.8bn. Mirae Asset Daewoo issued a total of 513 structured products worth KRW2.4tr in the first quarter of 2018, according to SRP data. For the same period last year, the group issued 771 structured products worth KRW4.3tr. About 58% (300 products) of all the products Mirae issued in 1Q18 were linked to the Eurostoxx 50 index. Also, 203 and 131 of the group's products were linked to the Hang Seng China Enterprises Index and the S&P 500 index, respectively.

Samsung Securities reported net income of KRW135.5bn for the first quarter of 2018, up 150% from KRW55.7bn in the same period last year. Similarly, operating income rose from KRW73.9bn in 1Q17 to KRW182.8bn, indicating an increase of 147%. On the other hand, operating expenses rose by 28% year-on-year, from KRW135.2bn to KRW173.1bn.

The group's net revenue went up 70% compared to the same period in the previous year and reached KRW355.9bn. Despite strong wrap account and fund sales, net revenue from financial products, including mutual funds, wrap accounts, OTC derivative products, bancassurance and trust, went down slightly by 7% year-on-year, from KRW96.1bn to KRW89.3bn due to ELS early termination revenue decrease. In 2017, OTC derivatives revenue saw an increase of 12.7% year-on-year, from KRW3.4bn to KRW3.9bn. ELS early termination revenue, however, fell from KRW50.5bn in 1Q17 to KRW41.7bn in 1Q18, up down 18%. According to SRP data, Samsung Securities issued a total of 584 ELSs and 81 DLSs in the first three months of 2018, down from 701 ELSs and 119 DLSs in the same period last year.

Revenue from investment banking went up significantly by 131%, year-on-year, from KRW10.2bn to KRW23.5bn, with revenue from structured products being KRW6bn, down from KRW7.9bn in 1Q18. However, the bank announced that structured product sales increased on alternative investment sales. SRP data shows that in the first quarter of 2018 Samsung Securities issued a total of 750 structured products worth KRW2.6tr, down from 876 products worth KRW3.3tr in the same period last year. About 83% of the structured products Samsung Securities issued in 1Q18 were linked to Eurostoxx 50 (457 products). Also, 325 products were linked to the Hang Seng China Enterprises Index, 200 to S&P 500 and 176 to Kospi 200.

Shinhan Financial posted net income of KRW858bn for the first quarter of 2018, down 14% compared to the same period last year when net income was KRW997bn. The group's interest income increased by 10.1% year-on-year to KRW2.5tr, attributed to resilient loan growth coupled with continuous margin improvement. Non-interest income increased by 29.3% on an annual basis to KRW384bn, due to increased evaluation gains from FVPL financial instruments (equity) coupled with robust fee income. Total operating income, including both interest and non-interest income, went up 12%, from KRW2.2tr in 1Q17 to KRW2.4tr in 1Q18.

Shinhan reported income of KRW74.6tr from financial products, up 5.9% year-on-year from KRW70.5tr. Income from ELS was KRW2.1tr, down 22.7% on an annual basis. According to SRP data, in the first three months of 2018, the group issued 472 ELSs and 54 DLSs, compared to 413 ELSs and 187 DLSs in the same period last year.

The group's assets under management (AUM) went up 3% year-on-year, from KRW40.7tr in 1Q17 to KRW41.9tr in 1Q18. Equity type assets were KRW4.4tr, up 21.9% on an annual basis from KRW3.6tr. Bond type assets went up 2.2%, from KRW12tr to KRW12.3tr, while derivatives went down 23%, from KRW2.3tr to KRW1.7tr.

Shinhan Investment, which houses the group's structured products operations, generated 11% of the group's net income in the first quarter of 2018. The company reported a net income of KRW97bn in 1Q18, up 111% on an annual basis from KRW46bn.

According to SRP data, in 2017 Shinhan Financial issued a total of 613 structured products worth KRW2.4tr. For the same period last year, the group issued 696 structured products worth KRW2.8tr. About 72% of the group's structured products in 2017 were linked to the Eurostoxx 50 index (439 products). Other popular indices included the Hang Seng China Enterprises Indices (334 products), Nikkei 225 index (184 products) and the Kospi 200 index (164 products).

KB Financial Group, owner of KB Securities which in mid-2016 merged with Hyundai Securities, reported that net interest income from the securities business increased by 15.9%, from KRW1.8tr in 1Q17 to KRW2.1tr in 1Q18. Net fee and commission income went up 20.8% from KRW520bn to KRW628bn on an annual basis. Similarly, the group's gross operating income saw a 20.6% annual increase in value to KRW2.8tr. Net operating profit went up 38.4% to KRW1.2tr which is attributable to overall effort to enhance profitability and cost-efficiency of the group and successful consolidation of KB Insurance.

In the first quarter of 2018, KB Financial Group issued a total of 591 structured products worth KRW2.7tr, according to SRP data. For the same period in the previous year, the Group issued 623 structured products worth KRW3.1tr. ELSs constituted more than 80% of the group's structured products (474 products). The majority of KB Financial's structured products were linked to the Eurostoxx 50 index (378 products), the Hang Seng China Enterprises Index (299 products) and S&P 500 (185 products).

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